Even if you are only marginally interested in crypto, you are likely aware of the events of the past few weeks in which the stablecoin “UST” lost its peg, resulting in a “death spiral” for both UST and the LUNA token, which is the centerpiece of the Terra ecosystem. For many in the crypto space, it has been tempting, convenient, or perhaps psychologically necessary to blame the demise of UST and LUNA on some outside agent, a bad actor, or a big Wall Street player intent on ruining crypto. In the heat of the moment, I also found myself prone to such musings, but the reality everyone in crypto must accept is this: Tera’s ecosystem was stressed, and it failed.
As we explained to current investors in a recent letter, our fund has never had exposure to stablecoins for one simple reason: while the yields are tempting, there are risks involved that we simply have not been willing to accept at this stage. Ours is an actively traded, actively managed fund. Sure, 20% APY on stablecoins is tempting, but as recent events have shown, those yields come with risk. In the case of LUNA, those yields came with catastrophic risk. To those who lost life savings, we are certainly sympathetic. We do see potential value in stablecoins as a concept within the crypto ecosystem, and so we see how many saw promise in LUNA.
With the demise of UST, it is likely that stablecoins will soon be under an intense scrutiny from regulators around the world. What direction this takes is anyone’s guess, but one consequence of this scrutiny is that Bitcoin is likely to re-emerge as the prime mover within crypto. While it has retained its market cap dominance since its creation, it is constantly under attack by foes inside, and foes outside the crypto space. With stablecoin stability now being questioned, Bitcoin as the “base layer” within the system is more easily seen as desirable, at least for crypto believers.
As a crypto enthusiast, I have no problem with the speculative nature of the space. What I do have a problem with is the perception of “purity” across the space just because it claims to be decentralized or unregulated. Being involved in crypto today does mean you are early to the space. Congratulations. Our being here might mean we have a good gauge on the future of finance, but it does not mean we hold some sort of moral high ground. LUNA now appears to have been a flawed token with a flawed “mint” and “burn” process with UST. How moral was it to promise something that couldn’t survive a real world stress test?
In the midst of the Terra downfall, I have heard very little discussion about “Proof of Work” and “Proof of Stake” differences. Bitcoin is currently the enemy of the IMF, the SEC, the EPA, and who knows who else. Maybe, just maybe though, the fall of Terra will usher in a new era of appreciation for proof of work protocols like Bitcoin. No, they aren’t as fast. No, they don’t scale quite as well. Yes, they use more energy. No, they don’t generate 20% yields, but at the end of the day, if crypto is going to become what we think it can, it will need a base layer that can be relied upon. Even in this bear market, Bitcoin has shown itself to be nothing, if not reliable.